By The Star Staff
Gov. Pedro Pierluisi Urrutia announced on Tuesday, along with Treasury Secretary Francisco Parés Alicea, that he will file a bill in the Legislative Assembly that will introduce an Adjustment for Cost of Living into the Internal Revenue Code in order to increase tax benefits and counteract the effects of inflation on individuals.
“The COVID-19 pandemic and other global factors have contributed to the increase in the cost of living for Puerto Ricans,” the governor said at a press conference. “We have seen how supply and distribution chains around the world have been affected and this, in turn, has led to an increase in the price of goods and services, along with a reduction in the value of money. With the Cost of Living Adjustment we seek to give relief to taxpayers, by reducing or eliminating the indirect increase in income taxes caused by that inflation.”
Pierluisi was also accompanied by the executive directors of the Office of Management and Budget (OGP by its Spanish initials) and Fiscal Agency and Financial Advisory Authority (AAFAF), Juan Carlos Blanco and Omar Marrero Díaz, respectively.
The Cost of Living Adjustment in the bill is proposed both for current tax scales and to increase the maximum limit that can be claimed in certain existing deductions and exemptions. Parés Alicea noted that the measure would increase the line of income based in that an individual would begin to pay taxes on a particular tax scale, from the tax year 2023 onwards.
“This bill also adjusts the limits for deduction of mortgage interest, contributions to individual retirement plans, or IRAs, and contributions to educational accounts,” Parés Alicea said. “It also increases the personal and dependent exemption, which since 2011 have remained at $3,500 and $2,500, respectively. The Cost of Living Adjustment does not alter tax rates and will only apply to individuals.”
Under the legislation, the Treasury Department must calculate the impact that the Cost of Living Adjustment would have had on the taxpayer, if any, and will send a payment to that taxpayer. Payment will be made on two dates: June 30, 2023 for returns filed on or before April 17, 2023 and Jan. 31, 2024 for returns filed after April 17, 2023, but on or before Oct. 15, 2023.
“This bill seeks to give relief to our people in the wake of inflation, using a mechanism already recognized at the federal level to make adjustments for the cost of living,” the governor said. “We estimate that this will cost about $67 million. AAFAF and OGP will integrate this new rule of law, once approved, in the projections of the Fiscal Plan and the budgets of the Government of Puerto Rico, so we understand that the fiscal impact will be minimal and can be absorbed given the economic progress we are having.”
The bill details that inflation is reflected in the Consumer Price Index (CPI), which in June 2022 increased 9.1% over the previous year. The formula for the Cost of Living Adjustment will be the percentage, if any, by which the CPI of the previous calendar year exceeds the CPI for the calendar year preceding it. Therefore, to determine the Cost of Living Adjustment for the 2023 tax year, the percentage by which the CPI of the year 2022 exceeds the CPI of the year 2021 must be measured.
Meanwhile, for the incentive that will apply only in the tax year 2022, the percentage by which the CPI of the year 2021 exceeds the CPI of the year 2020 will be measured. The Treasury secretary will determine the adjustments to the items each year based on that formula.
In Puerto Rico, the tax lines for individuals have not been revised since 2013. Although a discount was introduced in the normal individual contribution of 5% through Law 257-2018 and 8% through Law 40-2020, the discount does not compensate for the inflation experienced on the island since 2013, the officials noted.
“This measure, for the first time, tempers the tax lines to the impact of inflation that we have faced in the last decade and that is projected to continue for the coming years,” Pierluisi said. “As we have worked for the past two years, we will continue to identify alternatives to continue improving the quality of life of our citizens and provide relief to the pockets of our working class.”
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